New CWB Producer Pricing Options

[charliep]

Tom4CWB reminded me that today is the first round of pricing alternatives under the CWB program. It will apply to all wheat (excluding durum) and feed barley. Watch for them this afternoon. I look forward to your comments/questions.

[TOM4CWB]

Charlie,

I found it interesting yesterday at the Alberta Marketing Choice meeting, that the CWB is now calling these Fixed Price Contracts, the "daul market"

How does this fit with your definition of a dual market?

Further the CWB says since hardly anyone is using the contract program, that no-one wants a "dual market"!

Would this be a fair assesment?

[bbrindle]

(I'm actually commenting on some discussion under the acreage shift thread but I thought it would fit better under this heading)

I wish we could think of another word to use for the CWB's "basis" since it really isn't a true basis. I know we have use the term here, since that is the jargon the program uses, and to do otherwise would get everyone totally confused. Yet I think it is misleading to call it a "basis" since the whole program is still grounded in the PRO estimates. In grain marketing the "basis" is the difference between a cash and a futures price and since there is no true cash price involved, it is misleading to call it a basis.

Yet I agree, farmers should pay attention to the program and the terms the CWB puts out today and through spring. It is possible that a fixed price or the CWB "basis" might be a good tool to use this year as part of an individual marketing plan. That's for each farm to decide - i.e. don't mix politicis and good farm management. But I'm still frustrated about the use of the term "basis" in this context because it is misleading and a lot of smoke and mirrors. I guess I'm just venting!

[TOM4CWB]

Well there off!

#1CWRS 13.5 is $215.31/t basis port position

The basis is a positive $18.13 off Dec Min. with the futures dollar conversion price at $197.60/t

The basis is a positive $12.15 off Mar Min. with the futures dollar conversion price at $203.16/t

The #1CW feed barley PRO is 147.00/t and the Producer Payment Option is $130.25/t basis port position.

Looks like the CWB is big time bullish on wheat!

[Braveheart]

It is incorrect and confusing to refer to "basis" in the CWB pricing options. Basis in my mind is the difference between the futures price and cash. When we refer to basis in the CWB pricing option it is the difference between the PRO and Mpls futures. Some of my colleagues want the CWB to refer to it as a "spread". This would still not be accurate. The only definition of this number I can think of is CBA or, crystal ball adjustment.

That being said, I think producers should pay attention to this program. Farmers could do quite well if some bullish scenarios develop, and it could be an important part of a marketing plan.

I am concerned that CWRW is being priced off of Mpls (with a grade spread deducted) rather than off of KCBT, the true HRW market. It may limit some opportunities.

To Tom4CWB, the CWB pricing options are not dual marketing. They are pricing alternatives. Farmers don't market wheat. The CWB does after they take it from us. Our only choice is payment options.

Braveheart

[TOM4CWB]

Braveheart,

I think you are right on track on all counts.

If there were a little competition, the CWB would be using Kansas City, or they would loose big money. They yet may loose big money, because of this error.

Winter and CPS wheats are such a small component of their market that they just don't care.

It is not worth there time and effort to care.

No-one can make them care.

The directors voting on these options can't even use them, so why would the advisory old boys club care.

But the crumbs under the table are better than no crumbs at all!

[TOM4CWB]

Is this right? March 22 pro #1 13.5 pro $224, #1 cps $179, difference of $45. March 27, fixed price of $219.63. Do we subtract the difference of $45 for cps? This would give a guaranteed price of $174.63, this doesnt sound to bad if you can deliver early (Less than .10/bu to store untill july). Am I doing the math right? thanks for any input.

[charliep]

Atsinger

As a note of clarification, the fixed price contract (FPC) spreads between CPS and other classes will be based off spreads in initial payments versus the spreads in the PRO.

The process next fall is that you deliver whatever grade/class of wheat you have and receive the initial payment. Your fixed price portion contract (advance on final payment/top or what ever you want to call it) is the difference be the amount you contracted on your fixed price contract and the initial payment for 1 CWRS 13.5 % protein at that time. Just to highlight again, you will have recieved your total payments up front and will not receive any final.

An example is likely easier so here goes. You decided to contract this go at $220/t on a fixed price contract. Until initial payments are announced in late July, you won't know the grade spreads. Let's assume that July 31, initial payment for 1 CWRS 13.5 % proteitn wheat is $165/t and 1CPSR is $130/t - difference of $35/t. Note that all these prices are basis port.

When you deliver your first load of 1CPSR on Oct. 1, your initial payment is $85/t (local elevator - I assume $45/t CWB deductions). The additional income/price from the fixed price contract is the difference between your contracted price and initial payment for 1CWRS 13.5 % protein. You contracted for $220/t. Initial payment is $165/t. The additional payment from the fixed price contract is $55/t. You are sent a cheque in the mail within about 2 weeks. Your total value of the CPSR wheat you delivered would be $140/t ($85/t local initial plus $55/t FPC payment).

Because you don't know initial payment spreads, this is a risk factor you will have to include in your decision about contracting. It is also a factor determining the effectiveness of the FPC contracts. Are initial payment spreads wider or narrower than those of the PROs (wider is bad, narrower is good)? What happens if spreads on total payments are different than that of the initial payments at time of delivery? What happens if spreads change as a result of adjustment payments during the year (eg. maybe protein is higher valued than expected so 1CWRS 13.5 gets a bigger adjustment payment than CPS)?

All these factors mean you will not 100 % know the price you lock in on a CPS wheat if you contract this spring. There shouldn't be a lot of variation from the current year, however.

The other way to approach (I'm assuming you grow CWRS wheat as well) is to just contract wheat and when initial payments are known this fall, make your decision as to which wheat classto deliver against the contract depending on which one is more advantageous. The CWB will ask at time of contracting but I don't think you have to comment as to class you will deliver agains the contract.

Any comments or questions about the contract.

[charliep]

Asleep at the switch on my part Atsinger so I missed you were asking about delivering using old crop contracts/deferring payments into new crop pooling year using FPC contracts. Same comments apply with the highlight that grade spreads become even more critical in this case.

Note for others - this is a good tool for those of you who can afford to defer your pricing decision into new crop year pricing pool on existing farm stored grain that is contracted. Depending on what happens with prices over the next 4 months, you have opportunity for a better price/total than in the current crop year and you will actually get paid faster (accepting that you will have to wait for Aug. 1 for the new crop year initial payment).

[TOM4CWB]

Charlie,

The old crop delivered into the new 2001-02 crop year appears to be an excelent tool, and is part of our planning when selling the FPC.

We did this last year, and it made us $10.00/t

[tclark]

I'm trying to confirm with the CWB that you can price wheat with a FPC on wheat delivered in 00/01 crop year. I know you can price into the next pool, but I haven't seen you can use FPC, or is that what you actually did -Tom4cwb. I have some Series B CPS that I would probably sell that would net about $3.60/bu - ($218-41-45). I'm thinking of using FPC for my off the combine wheat sales. Net of #1CWRS 13.5 at $4.85 looks pretty attractive.

[charliep]

Tclark

You can the same process you do now when deferring your payments into a new crop year - deliver on old crop contracts, put your grain on a storage ticket until Aug. 1 and use new crop pricing/pooling alternatives. The only issue I can see is the willingness of elevator companies to allow farmers to put their grain on storage tickets 4 months ahead of new crop (you likely will have to pay storage). If the CWB puts a termination on the "B" series (not likely for CPS wheat given slow calls to date), then you may get squeezed to deliver.

You are likely wanting to hear the above directly from the CWB. I would call the CWB toll free (800 ASK 4CWB) or email them with your question. I use both these alternatives when I have questions.

[TOM4CWB]

tclark,

I specifically asked Ken Ritter this question at Forestberg, as the CWB had been hinting that they were going to stop the interyear swithching.

Ken Ritter's response was that trying to stop this practice would be nearly impossible. The result was that the CWB accepts this practice, the same as swithching pool crop years.

Normally, most grain co's will allow 90 days free storage, which has been the practice in previous years.